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Differential Analysis: Excellent Tool for Buyer Evaluations

Hi guys,

Learned this method of valuation in school (UWO) from one of my business classes, figured it would be very useful for people who haven't had the privilege of having financial education. Its fairly simple, scalable and a powerful way of evaluating a potential site acquistion.

Its called a differential analysis, and you basically read it top to bottom. I've attached a sample file for you to look at.

Cash Inflow:
Simply add annual revenue, if you know where exactly it comes from, ie. Adsense, Link Sales, etc. you can create sub listings. Any money that comes in from the site directly, goes here.
Cash Outflow:
Any annual expense required for running the site goes here. This includes hosting, advertising, employees, whatever. Cash outflows does NOT include investments, or any payments that are made one time.
Net Cash Flow: You should now have a net cash flow of Inflow - Outflow.

Investments:
This area is for the investment required. If the site is $65k, then add this cost. If you expect that you'll need to add $5k worth of development, then that is an investment, so add it.

Ratios:
Now that you have a Net Cash Flow and a Total Investment numbers, you can apply them to create two ratios.

ROI - Return on investment, this is basically the percentage of money you'll be making back from your investment on an annual basis. The higher, the better. With ROI ratios, you can compare with other options for investing your money to see if the site is worth your while, ie. savings, mutual funds, securities with known ROIs.

Payback: This is the amount of time in year that it will take to break even, for your investment to pay itself off. You want this to be small, because the sooner you break even, the sooner you can start making a profit off your investment.

So all these things are relatively simple, the great thing about constructing a differential on a spreadsheet is that you can create different scenarios, from left to right. You can be more conservative and more aggressive, for example varying annual income, or changing the cash outflows, investment costs, etc.

This will help you get a fuller picture of the endevaour you are about to acquire. It is a strictly financial perspective, which does not include many factors like risk, industry, competitors, etc. The internet is largely unpredictable as well, you never know when you're server will crash, or when you'll get a huge traffic boost from a link. But it is still very powerful in getting you the numbers you need to know. Let me know what you think.